Dennis Howlett has written a thoughtful review of my paper on small business taxation. Unfortunately, I think he misses quite a number of the points I made. So I'll clarify them. He says:
His solution to 'income splitting' of the kind common in small limited companies involves what I believe are unworkable measures but ones that make trading through a Ltd economically untenable. .... In France, the lowest level of investment required to establish an equivalent entity is €7,500. That is seen as a significant impediment to helping business get off the ground and has been a constant source of complaint by those seeking to set up in business. So at £20K I can envisage all sorts of howls from small business.
But that's not true. I'm offering every small business a better solution: an LLP which has lower admin and more flexibility together with limited liability which is available as readily as a limited company and at no more cost. There is no obstacle here: I'm lowering the burdens on business with all the gains remaining. That's a plus, not a minus. Why howl in protest in that case?
As for income splitting, Dennis says:
Richard then goes on to apply tests for assessing income splitting based upon:
i.Time expended;
ii. Evidence of management input e.g. attendance at meetings, client premises, emails sent, etc.;
iii. Evidence of key services supplied e.g. technical input,invoicing, project management, product sourcing, etc.This is unworkable and unrealistic. Apart from radically increasing the administrative burden, it makes no allowance for innovations like value based pricing. Neither does it allow for those moments when, as I have found, my wife comes up with flashes of inspirational brilliance although she has very little to do with my business.
Again though Dennis has missed the point. My model is specifically designed to recognise those moments of brilliance. I suggest part of the net income of the company can be allocated for such enterprise input without challenge being allowed. That has to be better than the existing arrangement. And I make clear, anyone could argue for a different ratio: they'd just have to prove that it was appropriate. That's completely fair.
As further evidence that Dennis has missed the point I offer this:
I see Richard's approach to limited companies as at best discriminatory. It doesn't potentially allow for those small partnerships where - as is often the case - profit division is decided on a year to year basis.
Actually, my solution is not about limited companies - it's about LLPs, and it is offered precisely to allow this flexibility, and backstop position for those who don't want to keep records. That has to be better than what we have now.
In addition, this is wrong:
It is for example worth looking at at least one of Richard's other suggestions; that of imposing NIC charge on dividends.
I suggested an investment income surcharge, which is income tax, not an NIC charge. An income tax charge is much easier to collect, and has no upper limit.
So I welcome the contribution - but what I have suggested is much more subtle than Dennis has appreciated, I think. And it's that subtlety that makes all the difference. It creates the right instrument for the job: what we have no is the wrong instrument for the job, which is why the system does not work and lacks any subtlety at all.
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Richard – thanks for the evisceration – always appreciated 😆 Please do take my word for the French ‘connection’ – I lived there for some 7 years and saw at first hand the results of that policy and how it affected my personal business.
I DO agree LLP status is a viable alternative but you also agree there are many hurdles.
My point is with what I think we’d both call ‘the remainder.’ I still maintain the solution you propose for those that choose to remain LTD is fraught with issue even though you try to find reasonable work throughs.
I’m NOT missing your point, I’m drawing attention to the problems attached to dealing with LTDs under the regime you propose. I hope! If I’ve missed that point then fine – please demonstrate.
Dennis
Point taken
But my objective is to get them out of LTDs and into LLPs because these make sense for them. So staying will be meant to be penal.
Richard
Gentlemen
Could I please ask, if small Ltds who don’t plan to grow become LLPs, what of those Ltds who only have one director/shareholder?
I know Arctic Systems doesn’t apply in that case as such, because there’s no divide of dividend income, but the director/shareholder is still paying lower tax on dividends than they would if they were unincorporated.
Under Richard’s suggestion, would those companies have to revert to sole traders?
M
M
I’ve never agreed with one person companies anyway – a recipe for fraud
But if necssary we’ll have to resort to one person PPLs I guess
Richard
However, LLPs may not be open to all people who /could/ operate as a shareholder in a LtdCo – eg. disqualified directors. So they would then be re-penalised.
MikeW
You aren’t serious, are you?
I hope not
Richard
See http://www.insolvency.gov.uk/guidanceleaflets/effectofadisqualification/effectofadisqual.htm
Section “Sole trader or partnership”:
“… forming or managing a limited liability partnership …”
Mike
You miss my point – I am saying I hope you do not think they should be in business – that is why they were disqualified after all
Ricgard
” The order or undertaking does not stop you carrying on business as a sole trader or in partnership with others ….” so in fact the disqual is not to prevent them being “in business”.
Which I think to be wrong – they remain a risk in that case
I would certainly wish to exclude them from any limited liability